Billions of Dollars Paid for Underperformance

Oxford study questions the value of advisor recommendations.

NEW YORK (MainStreet) ¿ Universities, foundations, endowments and retirement plans may be spending billions of dollars for investment advice with little, if any, return. In fact, a study by a team of Oxford University researchers says mutual fund recommendations made by investment advisors simply do not outperform other investments.

Over $13 trillion of U.S. institutional assets are advised by investment consultants at a cost of billions of dollars per year. The result? An underperformance of about 1.1% annually, compared to other investments. And that's before fees were deducted.

The academics pored over thirteen years of survey data, examining the fund selection of actively managed U.S. equity mutual funds recommended by 29 investment consultants for the period 1999-2011. As of 2011, these advisors represented a 91% share of the U.S. consulting market.

"The analysis finds no evidence that the recommendations of the investment consultant for these U.S. equity products enabled investors to outperform their benchmarks or generate alpha (excess return relative to a benchmark)," the study concludes. "This raises the question why plan sponsors engage investment consultants to help select fund managers without evidence that they add value."

Tim Jenkinson, Howard Jones, and Jose Vicente Martinez of the Saïd Business School at the University of Oxford conducted the research.

"In many cases, ultimate fiduciary responsibility for the performance of the assets rests with trustees who are non-specialists and require independent and specialist advice," the report says. "Some consultants show their 'value added' by comparing the performance of a portfolio of their recommended funds with that of an appropriate benchmark. However, they do not generally compare this performance with the performance of institutional funds which they do not recommend, nor do they make available the underlying data for scrutiny by third parties."